Steve Writes In “I Want to Cash Out My 401(k) And Pay Off Debt.”

Steve wrote me through the GetOutOfDebt.org site to ask his question below. You can too!

“Dear Steve,

I currently make $46,000.00 per year with no benefits. My wife’s income is $19,800.00 per year. Three years ago her income was $35,000.00 per year.

We have racked up about $20,000.00 in credit card debt and have a car loan of which the pay off is $15,199.00. Our 5 year old home is appraised at $158,400.00 and we owe $120,000.00 on it. No other debt. We have a small 401k of $39,550.00 and am losing between $200.00 and $500.00 a month on. We are 59 years old.

I want to cash our 401 in and pay off the credit cards and what I can of the car. We would start paying back out retirement at $600.00 per month.”

Dear Steve,

One of the key factors here is that you purchased your home and based your expenses on what your lives were like five years ago. Apparently two years latter there was a change in income for your wife and it was at that time that things probably begin to silently slip and the credit card debt started to increase to help make ends meet.

The 401(k) plan feels like your cash sitting in the bank and at a time of stock market upheaval watching the value slowly decline is painful, for sure. But the stock market will rebound over time and those funds will go back up.

If you tap those funds now you would probably have to pay a penalty of 10% of the value of the funds on top of your normal income tax rate. That means that you could cash out your retirement fund right now and walk away with around $26,000, losing around $13,500 to taxes and penalties.

With that $26,000 you should probably pay off your car loan first and then half of your credit card debt. While you say it is possible, I remain skeptical that you would be able to start saving $600 a month after that.

Depending on how much your car payment is, your credit card minimums are probably around $400 a month. That might reduce your expenses by around $850 a month. That little bit of breathing room might just be enough to help you make it from month to month but if you can’t make your monthly contribution back into the retirement account you could wind up in worse shape.

So while the plan is to put $600 a month back into the retirement plan, in six years when you reach 65 you’ll have about $43,200 in your 401(k), more or less.

Now, all of that being said, it might be beneficial for you to cash out your retirement plan as long as you retire the car debt, half of the credit card debt, faithfully add the funds back into your retirement account and don’t suffer any future reduction in income.

It’s a gamble but really only you can decide if you want to take the risk.


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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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3 thoughts on “Steve Writes In “I Want to Cash Out My 401(k) And Pay Off Debt.””

  1. Why not draw it pay off high intrest loans or credit cards. Could you not increase the money you put into your 401. The money you would save in intrest would more than make the differance. No?

  2. Sad story: I’m 70 years old and I currently get checks for $975 per month SS: (They take 15% of my award), (about $150 @ month for unpaid student loans). My wife, (64) works 28 hrs. a week so she can get medical benefits. She takes home about $1100 a month, (after taxes and buying $200 a month in company stock. (walmart kicks in 15% up to $2500) so she gets all she can out of her investment. She also gets $961 @ month SS. Her 401K has dropped from $43000 to $33000 in the last four months! should we bail out? We only have a balance of $9000 left on our house, (value in this market about $90,000) There is no pre-payment penalty if we pay it off.
    We can easily make it on our combined SS, (around 2K a month)(less our $377 @ month on our mortgage if we keep it for another year. Seems like a no-brainer: Take the lousy $33,000, pay of the house ($1700 savings) and live mortgage-free on around 2k a month. Wad’ya think? Cash in, or wait it out for another year until My wife reches 65


    • Bob,

      Your idea seems to make sense but only you can decide if that is what you want to do. However, the money you cash out now could be worth a lot more when the market rebounds. Who knows how long that will be.

      On the other side, it is really nice to live without a mortgage.



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